What is OTC trading?

by in Crypto 101, Cryptocurrency For Beginners


Bitcoin trading is not only about making deals by amateurs on great crypto exchanges. OTC trading plays an influential role in the life of the coin market. OTC stands for Over-the-Counter, in literal translation - bypassing the counter / past the counter. Mostly big players are involved in it, that is, miners, early investors, or entire organizations.

What is the OTC Trading?

That is a transaction that takes place directly between two interested individuals (without the influence of exchanges).

OTC trading began long before the advent of the crypto market. With its help, financiers can make large transactions with an immense number of trading instruments like stocks and derivatives. Unlike traditional exchanges, the OTC market is decentralized with no specific physical centers in the world. There can also be mediators and representatives of both sides.

In traditional markets, OTC trading is especially useful when the stock of a small company cannot go public yet. Those who wish to trade in securities do without exchanges and make transactions among themselves.

On the crypto market, OTC transactions are often made by those who want to sell or buy a large number of coins. For example, it is quite problematic for a large miner to liquidate his Bitcoin holdings through traditional exchanges. He can sell them directly to a second interested party, bypassing centralized intermediaries.

According to analysts from Digital Assets Research and TABB Group, daily volumes on OTC transactions are higher than in regular trading on exchanges. That is why some of the influential marketplaces (Binance, Coinbase, and Circle) have started to provide OTC intermediation services.

Who does not trade on exchanges?

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The chief sellers are large miners who sell the mined bitcoins to institutional investors.

In October 2018, representatives of the OTC platform Cumberland reported that most of the company's work is done during Asian trading sessions. According to experts, it is at this time of day that the Antpool and BTC.com pools are selling off the stocks of mined coins.

Their clients (large investors and organizations) prefer to make transactions bypassing exchanges. In other words, in a case where there are a lot of bitcoins, OTC trading will almost always appear.

Why do regular users need OTC deals?

If you need a certain level of liquidity and anonymity, then OTC trading is the perfect solution.

For example, you have an impressive amount of cryptocurrency that you bought a long time ago. After the rapid rise in the price of Bitcoin, the value of your savings has skyrocketed, so for a quick sale, you need a rich buyer who can pay for everything at once. Sometimes the stock exchanges do not have a sufficient level of liquidity, but a large investor can provide it.

Besides, in such cases, anonymity is crucial. Exchanges will require you to verify your identity yo execute a large trade order, so you will have to forget about secrecy here. Finally, the direct selling of cryptocurrency will have almost no effect on its price on the exchange. A great deal will not bring down the value of the asset so, both parties will remain in the black.

How many cryptocurrencies do you need to complete OTC transactions?

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Intermediaries who work with large institutional investors are calling sky-high amounts. Smaller companies have a more mundane barrier to entry.

For example, the OTC platform from Bittrex requires its customers to make the equivalent of their transactions more than $ 250,000. Poloniex has the same limitation. But Binance prefers to count in bitcoins: here, transactions should be larger than 20 BTC, or about 219 thousand dollars at the current exchange rate.

Coinbase has a dedicated Prime service that only a closed group of institutional investors can access. Smaller customers should pay attention to Changelly: here, the starting limit starts from 10 BTC or 110 thousand dollars.

Are there any problems with OTC trading?

As in any other business, you must recognize fraudsters in time and take into account the risks when making a transaction.

Dramatic spikes in OTC trading activity occur after exchanges have been hacked. Hackers want to drain large amounts of stolen coins. Naturally, everything happens anonymously.

They can also use psychological pressure techniques to trick the customer. There are cases when scammers gave false information about non-existent bitcoins and then hid with the money given to them.

What are the solutions to these problems?

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Trading platforms are actively working to create custody solutions for large investors.

Analysts expect the growth of the OTC market to continue in the future. Accordingly, large trading floors will try to adjust to the growing demand. For example, the fifth-largest asset management company Fidelity is launching cold storage to serve firms that provide services to large clients. At the same time, Coinbase is also addressing problems related to OTC trading.